Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market∗

This paper studies the role of speculation in amplifying housing cycles. Speculation is easier in the land market than in the housing market due to rental frictions. Therefore, speculation amplifies house price booms the most in cities with ample undeveloped land. This observation reverses the standard intuition that cities where construction is easier experience smaller house price booms. It also explains why the largest house price booms in the United States between 2000 and 2006 occurred in areas with elastic housing supply. These episodes are most likely to occur in elastic cities approaching a long-run development constraint. ∗We thank John Campbell, Edward Glaeser, David Laibson, and Andrei Shleifer for outstanding advice and Robin Greenwood, Sam Hanson, Alp Simsek, Amir Sufi, Adi Sunderam, and Jeremy Stein for helpful comments. We also thank Harry Lourimore, Joe Restrepo, Hubble Smith, Jon Wardlaw, Anna Wharton, and CoStar employees for enlightening conversations and data. Nathanson thanks the NSF Graduate Research Fellowship Program, the Bradley Foundation, and the Becker Friedman Institute at the University of Chicago for financial support. Zwick thanks the Harvard Business School Doctoral Office for financial support.